<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-QSB
Quarterly
Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended December 31, 1997 Commission file number 0-12705
APPLIED DATA COMMUNICATIONS, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 93-2828385
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(State or other jurisdiction) (I. R. S. Employer Identification
of incorporation or organization) Number)
3324 South Susan St, Santa Ana, California 92704
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Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code: 714-668-5200
------------
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
---
Number of shares outstanding as of December 31, 1997: Common Stock, $.01 par
value 9,951,835 shares.
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<PAGE>
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement Regarding Financial Information 3
Balance Sheets December 31, 1997 (unaudited) and F-1
March 31, 1997 (audited)
Statements of Operations (unaudited) for the Nine Months F-2
ended December 31, 1997, and December 31, 1996
Statements of Cash Flows (unaudited) for the Nine Months F-3
ended December 31, 1997, and December 31, 1996
Condensed Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition 6
and Results of Operations
PART II OTHER INFORMATION 9
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES 11
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APPLIED DATA COMMUNICATIONS, INC.
FORM 10-QSB
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared by
Applied Data Communications, Inc. ("ADC" or the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information normally included in the consolidated financial statements
prepared in accordance with generally accepted accounting principles has been
omitted pursuant to such rules and regulations. However, the Company believes
that the disclosures are adequate to make the information presented not
misleading. It is suggested that the financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's annual report on Form 10-KSB for the fiscal year ended March 31, 1997
as filed with the Securities and Exchange Commission.
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Applied Data Communications, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Unaudited)
1. MANAGEMENT OPINION
In the opinion of management, the financial statements reflect all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position and results of operations as of and for the periods
presented.
2. ACCOUNTING POLICIES
The Company's accounting policies are as stated in its annual report on Form
10-KSB, dated March 31, 1997.
3. PREFERRED STOCK SALE
In October 1996, the Company initiated a private placement offering of preferred
stock, "Series A", as disclosed in its annual report on Form 10-KSB, for the
year ended March 31, 1997. The Company is continuing this offering currently,
and received $383,500 during the nine months ended December 31, 1997.
4. EQUIPMENT ACQUISITION AND FINANCING
The Company took delivery of CD-ROM manufacturing equipment totalling
approximately $990,000 on December 30, 1997. The Company incurred approximately
$900,000 in related indebtedness to be repaid over a three year period, and
granted a security interest in this equipment to the lender
5. DEBT CONVERSION
During December 1997, the Company completed exchange of certain notes payable,
totalling approximately $1.7 million, for an equivalent amount of preferred
stock.
6. GOING CONCERN
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has reported significant losses
for the last several years and revenues from existing products do not provide
sufficient cash to cover current operating needs. The Company has relied on
additional outside equity, obtained through its current private placement, to
meet obligations.
The Company has initiated plans to begin replication of compact discs, and
recently acquired equipment to add CD-ROM manufacturing and duplication
services to its product line. The Company is hopeful that these and other
steps taken to increase revenues of its existing products and services will
improve existing cash flows. Management is (i) continuing to raise additional
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funds through a private placement of the Company's Series A preferred stock, and
additional borrowings will be used, in part, to purchase new machinery used in
the CD-ROM process and (ii) continuing to institute operational changes intended
to lower operating costs and limit corporate overhead. The impact of these
measures and changes will not be realized until the first calendar quarter of
1998, at the earliest.
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APPLIED DATA COMMUNICATIONS, INC.
STATEMENT OF OPERATIONS
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FOR THE PERIODS ENDED DECEMBER 31, 1997
---------------------------------------
AND DECEMBER 31, 1996
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- ------------------
1997 1996 1997 1996
------------------------ ------------------------
<S> <C> <C> <C> <C>
REVENUES $ 119,139 $ 94,194 $ 327,491 $ 275,198
COST AND EXPENSES
Cost of sales 95,857 77,876 246,523 236,730
Selling, general and administrative 296,222 233,389 800,416 572,130
expenses
------------------------ ------------------------
392,079 311,265 1,046,939 808,860
OTHER INCOME/EXPENSE
Interest (income)/expense, net 71,222 90,552 250,487 218,585
------------------------ ------------------------
71,222 90,552 250,487 218,585
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES (344,162) (307,623) (969,935) (752,247)
PROVISION (BENEFIT) FOR INCOME TAXES 0 0 0 0
------------------------ ------------------------
NET INCOME (LOSS) ($344,162) ($307,623) ($969,935) ($752,247)
------------------------ ------------------------
------------------------ ------------------------
NET INCOME/(LOSS) PER COMMON SHARE ($0.03) ($0.03) ($0.10) ($0.08)
------------------------ ------------------------
------------------------ ------------------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 9,951,835 9,951,385 9,951,385 9,393,966
------------------------ ------------------------
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</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
APPLIED DATA COMMUNICATIONS, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND MARCH 31, 1997
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ASSETS
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<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
--------------------------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,920 $ 9,113
Accounts receivable 58,104 79,498
Inventory 5,453 8,375
Prepaid expenses 37,590 4,625
Deferred Charges 127,875 0
--------------------------------
Total current assets 231,942 101,611
EQUIPMENT 863,549 27,839
Net of accumulated amortization
of $98,184 and $76,935 at
December 31, 1997 and March 31, 1997
OTHER ASSETS
Other 0 0
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TOTAL ASSETS $1,095,491 $129,450
--------------------------------
--------------------------------
</TABLE>
LIABILITIES AND STOCKHOLDERS EQUITY
-----------------------------------
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
--------------------------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 425,116 $ 482,044
Accrued expenses 1,425,347 1,451,903
Bank debt 364,888 442,803
Notes Payable 1,823,890 2,712,485
Current Maturities, Long Term Debt 313,216 0
Income taxes payable 0 0
---------------------------
Total current liabilities 4,352,457 5,089,235
Long Term Debt 587,006 0
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, Series A, $.01 par value,
Authorized 500,000 shares
Issued and outstanding, 150,490 and 80,790 shares
at December 31, 1997 and March 31, 1997 1,689 808
Preferred stock, Series B, $.01 par value,
Authorized 200,000 shares
Issued and outstanding, 32,798 and 0 shares
at December 31, 1997 and March 31, 1997 154 154
Preferred stock, Series C, $.01 par value,
Authorized 200,000 shares
Issued and outstanding, 68,404 and 0 shares
at December 31, 1997 and March 31, 1997 684 684
Common stock, $.01 par value--
Authorized 10,000,000 shares
Issued and outstanding-- 99,518 99,518
9,951,835 and 9,951,835 shares
at December 31, 1997 and March 31, 1997
Additional paid-in capital, preferred stock 4,024,171 1,939,304
Additional paid-in capital, common stock 9,839,797 9,839,797
Accumulated deficit (17,809,985) (16,840,050)
---------------------------
(3,843,972) (4,959,785)
TOTAL LIABILITIES AND EQUITY $ 1,095,491 $ 129,450
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</TABLE>
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<PAGE>
APPLIED DATA COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
-----------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($969,935) ($752,247)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 21,248 23,751
Stock issued for services rendered
Changes in assets and liabilities
(Increase)/decrease in accounts receivable 21,394 56,879
(Increase)/decrease in inventories 2,922 51,539
(Increase)/decrease in prepaid expenses (32,965) (13,745)
Increase/(decrease) in accounts payable (56,928) (97,160)
Increase/(decrease) in accrued expenses (26,556) (80,663)
(Increase)/decrease in other assets (127,875) 0
Increase/(decrease) in other liabilities 0 0
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Net cash used for operating activities (1,168,695) (811,646)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (856,958) (1,368)
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Net cash used in investing activities (856,958) (1,368)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase/(decrease) in notes payable (888,595) (2,593,561)
Increase/(decrease) in current maturities
long term debt 313,216 0
Increase/(decrease) in long term debt 587,005 0
Borrowing/(repayment) of bank loans (77,915) 393,141
Net proceeds from issuance of common stock 0 1,397,258
Net proceeds from issuance of preferred stock 2,085,748 1,642,538
---------- ----------
Net cash provided by financing activities 2,019,460 839,376
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INCREASE/(DECREASE) IN CASH AND EQUIVALENTS ($6,193) $26,362
CASH AND EQUIVALENTS, beginning of period 9,113 2,974
---------- ----------
CASH AND EQUIVALENTS, end of period $2,920 $29,336
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Supplemental Disclosures
Cash paid during the period of interest $88,847 $56,585
</TABLE>
The accompanying notes are an integral part of these statements
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<PAGE>
APPLIED DATA COMMUNICATIONS, INC.
DECEMBER 31, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996.
REVENUES
Revenues for the three months ended December 31, 1997 were $119,139, up $24,945
(26.5%) from $94,194 reported in the comparable period of 1996. These volume
levels reflect continued evolution of the software duplication industry toward
distribution on CD-ROM (vs distribution on diskette), lower pricing for
diskettes, and increasing competition among firms continuing to provide software
duplication only on diskette.
Results for the current period reflect primarily that for duplication on
diskette (57.3%) and compact disc (27.4%), while those for the comparable period
for the prior year included duplication sales (62.5%) and service (maintenance)
sales (18.5%). Average revenue per invoice was $916.45 in the current year
compared to $577.88 in the prior year. Indicated revenue figures include
maintenance billings for prior year equipment sales of $14,555 in the current
year, vs $17,412 previously.
The trend toward CD-ROM based distribution has accelerated, increasing price
competition among "diskette only" duplicators. The Company's plans to add
CD-ROM manufacturing capability to its other replication services took a major
step forward during the quarter with delivery of its new state-of-the-art
replication equipment on December 30, 1997. The Company believes that addition
of in-house CD-ROM capability will allow it to better service its primary
customers, medium sized software developers, by adding this "full service"
capability. The Company anticipates beginning production during February 1998.
Consistent with these plans, the Company has intensified its marketing of CD
duplication services, as the basis for full scale marketing of CD services in
FY99. Several new customers have been added, which has increased CD sales
significantly over those of the prior year.
COST OF SALES
Cost of sales were $95,857 or 80.4% of revenues. This compares to $77,876 in
the comparable period in the prior year, or 82.7% of revenues. The lower
percentage amount in the current year reflects a modestly more favorable product
mix, with a lower proportion of sales coming from diskette duplication where
price competition is more developed. Direct costs including labor, diskettes,
labels and similar items, plus depreciation, as a percent of non maintenance
sales was 40.1% of such sales vs 50.0% in the prior year.
OPERATING EXPENSES, INTEREST AND FINANCING EXPENSE
Operating expenses were $296,222 (248.6% of sales), an increase of $62,833
(26.9%) from the $233,389 (247.8% of sales) reported during the comparable
quarter in the prior fiscal year.
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<PAGE>
Primary expenses in both years are compensation, rent, financing and legal
expenses. Higher operating expenses in the current period relate primarily to
legal costs including those related to the Company's current private placement
and expenses related to the Company's exchange of $1.7 million in notes payable
for preferred stock, completed in December.
Financing expense in the current period was $71,222 compared with $90,552 for
the comparable period in the prior year. The decrease of $19,330 (21.3%)
reflects lower effective borrowing rates for the Company's accounts receivable
financing.
NET LOSS
The Company had a loss of $344,162 (288.9% of sales) for the period as compared
to a loss of $307,623 (326.6% of sales) for the same period last year. This
equates to losses of $.03 and $.03 per share respectively, for the same periods.
The higher loss (in dollars) in the current period occurred because higher
product margins and lower interest costs were more than offset by higher
administrative and financing costs.
NINE MONTHS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996.
REVENUES
Revenues for the nine months ended December 31, 1997 were $327,491, up $52,293
(19.0%) from $275,198 reported in the comparable period of 1996. Results for
the current period reflect primarily that for duplication on diskette (57.1%)
and compact discs (14.8%), while those for the comparable period for the prior
year included duplication sales (61.3%) and service (maintenance) sales (17.5%).
Average revenue per invoice was $724.54 in the current year compared to $477.00
in the prior year. Indicated revenue figures include maintenance billings for
prior year equipment sales of $51,062 in the current year, vs $48,233
previously.
COST OF SALES
Cost of sales were $246,523 or 75.3% of revenues. This compares to $236,730 in
the comparable period in the prior year, or 86.0% of revenues. The lower
percentage amount in the current year reflects more favorable product mix in the
current year. Direct costs including labor, diskettes, labels and similar
items, plus depreciation, as a percent of non maintenance sales were 45.1% of
such sales vs 50.0% in the prior year.
OPERATING EXPENSES, INTEREST AND FINANCING EXPENSE
Operating expenses were $504,194 (242.0% of sales), an increase of $228,286
(39.9%) from the $572,130 (207.9% of sales) reported during the comparable
quarter in the prior fiscal year. Higher operating expenses in the current
period relate primarily to legal costs and audit costs, including those related
to the Company's current private placement and audit, outside professional
expenses and expenses related to the Company's relocation and its recently
completed debt exchange.
Financing expense in the current period was $250,487 compared with $218,585 for
the comparable period in the prior year. The increase of $31,902 (14.6%)
reflects the higher average borrowings for the Company's accounts receivable
financing.
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<PAGE>
NET LOSS
The Company had a loss of $969,935 (296.2% of sales) for the period as compared
to a loss of $752,247 (273.4% of sales) for the same period last year. This
equates to losses of $.10 and $.08 per share respectively, for the same periods.
The higher loss (in dollars) in the current period occurred because higher
product margins were more than offset by higher administrative and financing
costs.
LIQUIDITY AND CAPITAL
During the period ended December 31, 1997, the Company continued to experience a
significant level of operating losses, relative to its resources. Net cash used
in operating activities in the current period was $1,168,695 compared with net
cash used of $811,646 in the prior year. The higher cash usage in operations in
the current period occurred because of the higher loss in the current year.
Cash usage for investing activities was impacted by acquisition of CD-ROM
manufacturing equipment costing approximately $990,000. These activities were
funded by additional equity obtained through the Company's current private
placement and long term equipment financing. The Company further strengthened
its balance sheet by converting $1.7 million in notes payable into preferred
stock, which will also reduce future interest expense. The Company's cash
balances at December 31, 1997 and December 31, 1996 were $2,920 and $29,336, and
its net worth at December 31, 1997 was a deficit of approximately $3.8 million.
The Company's ability to operate effectively during the past several years has
been constrained by the extremely low level of its financial resources, by
expenditures involving its planned transition to CD-ROM manufacture and by an
increasingly competitive market for diskette duplication. Management's efforts
to address this situation have focused on raising additional outside funding,
continuing to address past financial obligations consistent with resource
availability and implementing plans to begin compact disk ("CD") manufacturing.
During the current fiscal year, the Company realized cash proceeds of $383,500
through its current private placement offering, including $132,972 in December.
Cumultaive funds raised, including a $400,000 "bridge loan", now total
approximately $1.2 million. This has permitted the Company to continue orderly
repayment of past due trade creditors and restructuring of its balance sheet.
The Company's plans to begin CD manufacturing will involve additional
expenditures for peripheral equipment and for marketing and organizational
expense, including a modest increase in staffing. Although ADC anticipates an
increase in revenues from CD replication, it continues to anticipate an
operating loss for the near future, albeit at reduced levels. ADC continues to
believe that meaningful business opportunities are available in the CD market in
view of the increasing availability of CD/DVD readers and products, and future
growth projected for this market.
In the meantime, the Company's operating cash environment continues to reflect a
shortfall of revenues from existing products to cover its cash needs, including
costs related to repositioning the business to convert to CD-ROM production. It
will continue to minimize cash outflows and
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rely on existing credit facilities and proceeds from its current private
placement until it achieves positive operating cash flows. The Company is
hopeful that this will begin in the first fiscal quarter (April) of 1998.
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APPLIED DATA COMMUNICATIONS, INC.
FORM 10-QSB
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
The Company is party to some litigation with various of its creditors regarding
payment of past due financial obligations. The Company has initiated
negotiations with such creditors relative to arranging extended payment
schedules for such obligations on terms comparable with those effected over the
past year.
ITEM 2 CHANGES IN SECURITIES.
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION.
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
None
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
APPLIED DATA COMMUNICATIONS, INC.
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(Registrant)
February 13, 1998 /s/ Barry K. Sugden, Jr
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Date: Chief Financial Officer
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,920
<SECURITIES> 0
<RECEIVABLES> 58,104
<ALLOWANCES> 0
<INVENTORY> 5,453
<CURRENT-ASSETS> 231,942
<PP&E> 961,783
<DEPRECIATION> 98,184
<TOTAL-ASSETS> 1,095,491
<CURRENT-LIABILITIES> 4,352,457
<BONDS> 0
0
4,026,698
<COMMON> 9,939,315
<OTHER-SE> (17,809,985)
<TOTAL-LIABILITY-AND-EQUITY> 1,095,491
<SALES> 327,491
<TOTAL-REVENUES> 327,491
<CGS> 246,523
<TOTAL-COSTS> 246,523
<OTHER-EXPENSES> 800,416
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 250,487
<INCOME-PRETAX> (969,935)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (969,935)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
